Institutional investors both here and abroad just can’t seem to get enough of 130/30 strategies, with firms including State Street Global Advisors, Société Générale Asset Management, Robeco Investment Management and New York Life Investment Management all launching versions in recent months, with more to come in the near future.
But why are these strategies gaining traction with long-only investors? Are they merely a fad or do they have significant staying power?
More Favourable Than Hedge Funds
Institutional investors and pension funds have shown significant interest in 130/30-type strategies because they give long-only investors the opportunity to get more returns per unit of risk, according to Arlene Rockefeller, managing director of global equities at State Street. “You get more returns per unit of risk because it allows you to take bigger small-cap positions, which in turn, allows you to take bigger small-cap positive positions,” she explains.
“It’s using the negative information that we’re unable to use in long-only strategies.”
Rockefeller also says investors like 130/30s because it is a way for them to get hedge fund-like exposure “without going all the way to a hedge fund” and paying higher hedge fund fees.
State Street, which many consider to be the leading player in the 130/30 space, launched its first 130/30 strategy focused on the Down Under equity market, the Australian Alpha Edge, in December 2004. The firm recently announced that its entire portfolio of a dozen 130/30 strategies reached the US$10 billion mark for total assets under management.
Precursor to Hedge Funds?
While some argue that 130/30 strategies are the first step for investors looking at the hedge fund space, Steve Landau, managing director for product development at NYLIM, doesn’t think so. He says most allocations to 130/30s stem from the termination of equities mandates.
“It is possible that institutional investors getting into 130/30s will be familiar and comfortable investing in hedge funds but that is not the goal. The perfect example is the fact that one of the early adopters of 130/30 is the California Public Employees’ Retirement System, which invested in hedge funds before they invested in 130/30s,” he says.
Clark McKinley, a spokesman for CalPERS, confirms Landau’s assertions. “For us, this strategy is another way to generate alpha for the fund,” he says. “While we don’t anticipate a major shift of our assets to this strategy, it offers us a proven option to further diversify our portfolio as we pursue investment returns that beat global equity benchmarks.”
The US$243 billion public pension fund recently allocated US$3.2 billion in total to the 130/30 strategies of Quantitative Management Associates, Analytic Investors and SSgA.
The US$8.9 billion Indiana State Teacher’s Retirement Fund, a newcomer to the 130/30 space, is also using 130/30 strategies as “a good diversifier and return enhancer,” according to Robert Newland, chief investment officer. The pension fund recently issued a request for proposal for 130/30 managers and plans to further invest in hedge funds later on this year.
“It’s a new strategy we’re trying out because our board wanted us to be more aggressive in our asset allocation and manager structure composition,” says Newland, adding that, “it’s difficult to find managers in this space with any history of it.” The fund is looking for shops with track records of at least five years.
As well, the fund is planning to make a hedge fund presentation to its board at the end of November. “We don’t have the resources to go out and select individual hedge fund managers so it would be through a multi-strategy fund of funds, but it’s not something that’s etched in stone,” says Newland.
Only Time and Returns Will Tell
While it seems like there’s a new 130/30 launch every week, Landau says there’s currently only about US$50-75 billion in total assets allocated to the space. “What will determine whether or not it’s a fad will be the returns,” he says.
Donald Porter, an analyst at Dalton, Greiner, Hartman, Maher & Co, which is planning the launch of its own 130/30 strategy this October, echoes Landau’s sentiments. “While they could be a fad, I think they are here to stay, unless managers are unable to add alpha through these structures,” he says.
This article first appeared in Vol III Issue No 32 of FINalternatives.